Public Bill Committee

[Mr Mike Weir in the Chair]

Schedule 5  - Eligibility and regulation of local auditors

Amendment proposed (this day): 123,in schedule 5, page43,line21, leave out
‘1221 (approval of third country qualifications)’.—(Roberta Blackman-Woods.)

Question again proposed, That the amendment be made.

Michael Weir: I remind the Committee that with this we are discussing the following:
Government amendment 22.
Amendment 125,in schedule 5, page45,line7, leave out paragraph (c).
Amendment 124,in schedule 5, page46,line3, at end insert—
‘(5A) The requirements under section (5) must in particular take full account of the need to understand the wider scope of public audit covering the audit of financial statements, regulatory, propriety and value for money.’.
Government amendments 23 and 24.

Brandon Lewis: I was in mid-flow when we adjourned this morning.

Chris Williamson: I have to ask the Minister why it is necessary to allow people without appropriate qualifications to undertake the audit function. What would he say to individuals who think that he is dumbing down the audit function?

Brandon Lewis: I suggest that the hon. Gentleman goes back to this morning’s transcript, where he will see that I made it abundantly clear that that is not the case. As per the code of practice—I appreciate from earlier discussions that he is not acquainted with it—auditors must use people with appropriate experience. Only firms and individuals that have the right level of skills, qualifications and experience will be able to audit local bodies.
As I was about to say when we finished this morning, to omit the requirement under amendment 125 would mean that the Financial Reporting Council could not approve a qualification for local audit. With that and other assurances, I hope that the hon. Member for City of Durham will withdraw amendment 123.
Government amendments 22 to 24 amend the provisions on appropriate qualifications for local auditors. Under paragraph 8 of schedule 5, a person holds an appropriate qualification for the purposes of undertaking local audit work if the qualification is recognised by the Secretary of State in accordance with regulations or is an appropriate qualification under part 42 of the Companies Act 2006. Under amendment 23, the Bill will specify which existing professional qualifications are considered appropriate qualifications for local audit in the new framework. That will ensure that individuals qualified under the Audit Commission Act 1998 can undertake local audit in the new regime.
Under the current audit regime, some individuals undertake local audit work for firms of auditors appointed by the Audit Commission, but hold a qualification—for example, the Chartered Institute of Public Finance and Accountancy qualification, as was mentioned this morning—that is not recognised as a statutory audit qualification under the Companies Act. It has always been our intention that those individuals should continue to have their professional qualification recognised. Setting that out in the Bill, rather than through regulations, will provide clarity and certainty.

Chris Williamson: To return to my point, why does the Minister think it is necessary to allow people to undertake the function if they do not have appropriate qualifications? He seems to be introducing additional measures to satisfy the Secretary of State that individuals who do not have an appropriate CIPFA qualification are eligible and suitably qualified to undertake the work, so why not simply refer only to people with the CIPFA qualification? I am interested in why he thinks it necessary to allow people without a relevant qualification to undertake the role.

Brandon Lewis: I am not quite sure whether the hon. Gentleman has been listening, so I repeat that, under the current audit regime, some individuals undertake local audit work for firms of auditors appointed by the Audit Commission, but hold a qualification that is not recognised as a statutory audit qualification under the Companies Act. One example is the CIPFA qualification —the opposite of what he has just said. The hon. Member for City of Durham said that it should be such a qualification, so I am not sure whether he is now arguing with his Front-Bench colleagues, but he can take that up with them later.

Andrew Griffiths: Perhaps the Minister will enlighten me about why the Opposition intend to prevent people who can currently undertake the job from continuing to do it?

Brandon Lewis: That baffles me, but I suggest that the hon. Member for Derby North may not have appreciated my point. I am supporting the argument made by the hon. Member for City of Durham. I hope that, when he reads Hansard, he will be satisfied that we are doing exactly what the Opposition asked us to do, but I can only assume that he has misunderstood the point.
Amendment 22 is a necessary amendment that follows from amendment 23. As we are now specifying qualifications in the Bill, rather than through regulations, it is necessary to modify section 1219(1)(a) of the Companies Act 2006 in paragraph 8 of schedule 5 to the Bill to state that a qualification is an appropriate qualification by virtue of that section, rather than referring to regulations. Without that amendment, the new provision in amendment 23 would not be effective.
Amendment 24 is a necessary consequential amendment to reflect the updated proposed provisions in amendment 23.

Roberta Blackman-Woods: I thank the Minister because Government amendments 23 and 22 go some way to address the issues raised in amendment 123. I hope that he was able to see from my nodding throughout his remarks that I understood that that was the case, so we will not press amendments 123 or 125. I am not sure, however, that his comments, helpful though they were, addressed the issues raised by amendment 124 about wider awareness of the public sector and relevant changes. I am quite happy for the Minister to intervene if he thinks I should be more reassured, but we will otherwise press amendment 124 to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: 124,in schedule 5, page46,line3, at end insert—
‘(5A) The requirements under section (5) must in particular take full account of the need to understand the wider scope of public audit covering the audit of financial statements, regulatory, propriety and value for money.’.—(Roberta Blackman-Woods.)

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 9.

Question accordingly negatived.

Amendments made: 23,in schedule 5, page46, leave out lines 9 to 19 and insert—
‘(7) A person holds an appropriate qualification for the purposes of this Chapter if, immediately before the relevant time, the person was qualified for appointment as an auditor under section 3 of the Audit Commission Act 1998 by virtue of the person’s membership of a body listed in subsection (7) of that section.
(7A) A person holds an appropriate qualification for the purposes of this Chapter if—
(a) before the relevant time, the person began a course of study or practical training leading to a professional qualification in accountancy offered by a body listed in section 3(7) of the Audit Commission Act 1998,
(b) the person would have been qualified for appointment as an auditor under section 3 of that Act by virtue of subsection (5)(b) of that section if that qualification had been obtained before that time, and
(c) he person obtained that qualification within the period of 6 years beginning with that time.’.
Amendment 24,in schedule 5, page46,line20, leave out ‘subsection (7)’ and insert ‘subsections (7) and (7A)’.—(Brandon Lewis.)

Schedule 5, as amended, agreed to.

Clause 18 ordered to stand part of the Bill.

Schedule 6  - Codes of audit practice and guidance

Question proposed, That the schedule be the Sixth schedule to the Bill.

Andy Sawford: We wanted to compliment the official who drafted the schedule. I encourage the Minister to ask them to cast their eye over the rest of the Bill in the same spirit: it may even have been the Minister who did it. The schedule is clear and defines its terms well. It is prescriptive where that is helpful, in the interest of the Bill’s objective of securing independent and thorough auditing of relevant authorities, but it has an appropriately light touch in places.
It is welcome that paragraph 6(1), headed “Publication of code”, states:
“A code of audit practice may be published in such manner as the Comptroller and Auditor General thinks fit.”
That is one occasion where the Secretary of State has not thought fit to make himself the public relations officer for the public audit organisations.
It is right that a Bill should not be prescriptive about how a notice may be published. We urge the Minister to consult the official who drafted the provisions—a person of great sense and good judgment—and to think about whether such a simple form of words would be much more appropriate at all the places in the Bill where the Government have been over-prescriptive about PR, with which they seem obsessed.
Will the Minister explain what the code will cover? The schedule sets out how it will be developed and may be published, to whom it may apply, and who will be consulted. All those things are important and welcome. However, the code of audit practice and guidance will be important in addressing such points as have been made by my hon. Friends the Members for City of Durham and for Derby North about the framework of public audit, and we envisage that that may form part of the code. Broadly what areas does the Minister envisage it will cover, given its significance?

Brandon Lewis: The schedule requires the Comptroller and Auditor General to ensure that there is a code covering the audit of all types of relevant authorities audited under the Bill, as well as of foundation trusts.
The audit of foundation trusts was provided for separately by the National Health Service Act 2006, but the Bill places a duty on the CAG to prepare a code that applies to their audit. That is to ensure that there is consistency between the audit of local authorities and all local health bodies.
Before preparing the code the Comptroller and Auditor General must consult key interested parties, including associations and representatives of the relevant authorities, local auditors and their regulators, and, in the case of foundation trusts, Monitor. Clause 19 requires auditors to comply with the code and have regard to guidance, so it is important to take the views both of parties undertaking the audit work and of those receiving and paying for the services. Following consultation, the Comptroller and Auditor General must publish a code in draft and send it to the responsible Minister, who will lay the draft code before Parliament. That process maintains and demonstrates the independence of the Comptroller and Auditor General from Government.
In keeping with parliamentary practice for statutory instruments subject to the negative resolution procedure, the draft code will be laid for 40 sitting days, during which time either House may resolve not to approve it. If either House resolves not to approve the code, it must not be published and the Comptroller and Auditor General will need to prepare another code, unless one is already in force. That important provision retains parliamentary oversight of the local public audit framework by enabling Parliament to reject a code should it see fit, demonstrating the Government’s commitment to maintaining independent, high quality audit for local public bodies, a matter that Members have been considering today.
The Comptroller and Auditor General is required to keep the code under review and make reasonable endeavours to publish a replacement code every five years. He or she may also make alterations to a code or issue a replacement within that period. That ensures that key interested parties, including Parliament, have a regular opportunity to review the code, supporting the Comptroller and Auditor General in fulfilling the duty to ensure that the code embodies best professional practice. The same processes for consultation, publication and parliamentary procedure apply to any replacement or altered codes, as applied in respect of the first code. If the Comptroller and Auditor General issues an altered code, the alterations must be clearly marked.
The schedule enables the Comptroller and Auditor General to require relevant authorities to provide information that is reasonably required to support the discharge of these functions. Clause 19 and schedule 6 require the Comptroller and Auditor General to prepare a code of audit practice and enable him or her to produce supporting guidance, independently and free from Government control. That not only meets the design principle of maintaining high standards of independent local audit, but supports auditors in applying a consistent approach. Retaining parliamentary oversight of the code demonstrates the importance with which we regard the audit of local public bodies, which together spend, let us remember, over £200 billion of public resources each year.

Andy Sawford: I thank the Minister for that illuminating insight into what the code may cover in the future. I also welcome the fact that the code will be subject to parliamentary scrutiny. The code will be very important, and I hope it will be brought forward in a timely way.

James Morris: I broadly welcome the hon. Gentleman’s remarks about how well drafted the schedule is. I want to draw attention to the fact that the schedule refers to the publication of codes rather than to a single code, reflecting the different sorts of authorities we are talking about, from small district councils up to larger local authorities. It may be that different codes are required to satisfy the requirements of that range of different sized authorities.

Andy Sawford: I know that the hon. Gentleman has taken an interest in this matter, not least through his role on the Select Committee on Communities and Local Government. He certainly demonstrates a consistent insight into the range of types of local authorities—through his work with small town and parish councils, for example. My reading of the plural in the schedule was in respect of different types of relevant authority—for example, the codes would include health bodies—rather than implying that codes will be set out for different types of local council, but the Minister can correct me if I am wrong about that. The point on which the hon. Member for Halesowen and Rowley Regis and I agree is that where it would be helpful to consider how a code might apply to a smaller authority relative to a large county or metropolitan authority, we hope that the Comptroller and Auditor General would look at that.
It is important that the code is brought forward in a timely way and that there is consultation. CIPFA has been incredibly helpful in shaping my hon. Friends’ thoughts on the Bill and also informing our Committee. I hope that CIPFA will be a key consultee of the Comptroller and Auditor General and that the Minister will ensure that the code is brought forward in a timely way. When considering whether to make its own appointment or go through the joint arrangements, the local authority will be able to look at what the code of practice would entail. Given the requirements placed upon audit through the code of practice, local authorities will be able to consider whether they will be best served by opting into a joint national procurement arrangement or by procuring their own independent auditor directly, by establishing an independent audit panel.

Question put and agreed to.

Schedule 6 agreed to.

Clause 19  - General duties of auditors

Roberta Blackman-Woods: I beg to move amendment 127, in clause19,page13,line12,at end insert
‘, including through joint arrangements with other relevant bodies.’.

Michael Weir: With this it will be convenient to discuss the following:
Amendment 128, in clause20,page13,line45,at end insert
‘, including through joint arrangements with other relevant bodies.’.
Amendment 129,in schedule 8, page67,line20, at end insert—
‘(1A) Where two or more auditors are appointed in relation to the accounts of a relevant authority, other than a health service body, the power to issue an advisory notice may be exercised by the auditors acting jointly, or by such one of them as they may determine.’.

Roberta Blackman-Woods: With your approval, Mr Weir, I will speak to amendments 127, 128 and 129 together, as they all deal with joint auditing arrangements.
I want to return to the thorny question that has dogged us several times already in our debates on the Bill: how the measures it contains are not really up to the job of auditing joint arrangements, particularly those of health and local government bodies. We all say that we want to see more integration between health and local government bodies operating locally and, in particular, delivering value-for-money services locally, yet the Bill does not seem to contain a framework that would enable joint auditing where that would be most appropriate. Indeed, the Minister made that clear in his response to the debate on Second Reading. If the Committee will bear with me, I will remind him what he said:
“A few comments have been made, not least by the right hon. Member for Leeds Central (Hilary Benn), about an audit for a modern world and authorities working together—an understandable point as we are looking to modernise the way we all work. Auditors of local government bodies and health bodies are required to comply with the relevant code of audit practice, and are used to working together across organisations in both the public and private sectors. It is right, however, that auditors must assess the body responsible for the spending, which is why the Bill is worded in this way.”—[Official Report, 28 October 2013; Vol. 569, c. 723.]
I am not sure that simply saying that the body responsible for the spending must be the body that is audited deals with the reality of how services are funded jointly or through pooled funding arrangements. We do not see arrangements in the Bill to enable joint auditing in the way that the public might expect where services are jointly funded. I therefore return to the issue of joint funding and audit arrangements, as set out in clauses 19 and 20, because it is not clear to Opposition Members why the Government have sought to differentiate the audit arrangements in the way that they have.
Clause 20 seems to place a requirement on health boards to align their audit functions with foundation trusts. Given the problems emerging with foundation trusts, we will need a reassurance from the Minister that that is an entirely wise course of action to pursue. Will he clarify whether my reading is correct and whether the changes in clause 20 mean that health bodies are no longer required to produce value for money reports in their audit statements? Baroness Hanham summarised the Government’s position in the other place:
“The provision in the Bill also aims to bring consistency for all health bodies. Currently, the audit opinions of health commissioning bodies and NHS trusts contain a specific opinion on value-for-money arrangements. The audits of foundation trusts do not, so we are taking the opportunity to bring all reporting into line and to improve the clarity of auditor reporting in the health service.”—[Official Report, House of Lords, 24 June 2013; Vol. 746, c. GC196.]
I am not sure how clarity follows from removing a value for money statement, so perhaps the Minister can explain that to me.
However, that is a minor point. The major point is that, after further questioning, Baroness Hanham said that other health bodies were coming into alignment with the way foundation trusts carried out their audit—that is, this is not an amalgamation of all the different systems. It would appear that health bodies across the board no longer have to include value for money statements. I am not certain that my reading of that is absolutely correct, so I would be grateful for some comments from the Minister. If health bodies are indeed not producing value for money statements, why is that the case?
The reason might be that clause 19(1)(c) and subsections (1)(c) and (3)(c) of clause 20 are supposed to cover value for money considerations, but it is not absolutely clear that that is what those provisions are supposed to do. It is a strange way of going about putting a framework for audit in place: removing a requirement that already exists for health bodies under other legislation and replacing it with a much weaker requirement under this legislation—if, indeed, that is what the Government are doing. However, it may be that those provisions are not meant to cover value for money, so I would be grateful for a response from the Minister about that.
The point of our amendments is to highlight the lack of consideration of health and local government bodies having joint audit arrangements where this would be appropriate. Instead, we have a set of arrangements set out in clause 19 for local government and a not entirely dissimilar set of arrangements for health bodies set out in clause 20. I do not want to go through the whole debate we had last Thursday again, but as these amendments look specifically at the duties of auditors, I want to press the Minister on why the Government think they should be different for health bodies and local authorities. That has not yet been made clear.
I want to draw the Minister’s attention to a pertinent document. It is probably sacrilege bringing an Audit Commission document into a Bill Committee that is putting in place the arrangements to replace what the Audit Commission did. Nevertheless, although we on this side of the Committee recognise that there were problems with the Audit Commission and that different arrangements needed to be put in place, I am anxious that, in getting rid of the Audit Commission, we do not throw the baby out with the bathwater—I think I might get away with that rather clichéd metaphor and, I hope, not be told off by the Chair for being inappropriate.
That document is important in this context, because in 2008 the Audit Commission sought to clarify in detail the joint financing arrangements that could be put in place for local authorities and health authorities and give advice on how those arrangements could be audited, so that the public could understand how services were being financed and how they were being made accountable. In fact, the Audit Commission said that health organisations and local authorities had long been encouraged to work together to provide comprehensive and responsive services that eliminate unnecessary gaps and duplications for service users. Service integration and joint commissioning of health and social care services need robust joint funding arrangements, include the pooling of funds and grant arrangements and the delegation of functions that are statutorily enabled. Other, non-statutory options include budget alignment.
That is critical, because auditors report that joint funding arrangements can be poorly understood and might not be well implemented in practice, which immediately flags up an issue for the Committee. We have been given a strong reassurance by the Minister about joint arrangements and pooled budgets. In policy terms, a number of us have argued for pooling budgets, because it can eliminate unnecessary duplication. We therefore want to promote the pooling of budgets where it improves service delivery and value for money, yet I am not sure that we will be able to account effectively for those pooled arrangements.
We are told that health bodies such as strategic health trusts, NHS foundation trusts and primary care trusts may participate in purchasing and/or providing any health-related local authority services—primarily social services, such as housing, community and acute services. However, as the Committee will know from our lengthy deliberations on Thursday, commissioning and delivery arrangements are now even more complex, because of top-down reorganisation, than they were when the Audit Commission report was produced in 2008. There is perhaps an even greater need for clarity about audit arrangements now—at least it is possible to run an argument along those lines.
We know that four or five different bodies are now involved in commissioning locally. A whole range of private and public sector organisations may be involved in the delivery of services, which may happen through a variety of pooled or single funding arrangements. The Minister will need to go some way to reassure us about the reality of what is happening on the ground. He said he wanted to set a framework for the arrangements of tomorrow to reflect what would happen with our local services in future, yet the Bill’s proposed audit framework does not seem to reflect that desire.
The Audit Commission was clear about how budgets should and could be pooled and how proper audit arrangements need to be put in place, reflecting joint working among a number of professionals from different authorities or agencies. Surely the Minister agrees that it would be a missed opportunity to align the auditing of the different organisations involved if changes were not made to the Bill, particularly in clauses 19 and 20, to reflect what is happening on the ground.

Chris Williamson: I rise to support my hon. Friend’s amendments. I want to speak to amendment 126. She made the point that the measures in the Bill are—

Michael Weir: Order. Amendment 126 is not in the group of amendments being discussed.

Chris Williamson: I beg your pardon, Mr Weir; I thought it was grouped with the others.

Brandon Lewis: I think that sums up some of the conversations we have had today about misunderstanding exactly what is going on.
The environment is changing fast, and more local authorities are working together, sharing management and services through community budgets and the transformation network. Public authorities are working across the public sector. We need to ensure that we have an audit procedure that is flexible enough to recognise that. It should not be caught up in a top-down structure, but be flexible enough to work appropriately in different areas. The Bill does that perfectly well, and I will explain why in a bit of detail.
The public audit framework is designed to provide assurance about how each individual public body has used the resource provided by those to whom it is accountable and about the decisions it has made. On the scope of audit for CCGs, for example, the Bill does not change the scope of audit for the principal local government bodies or health bodies from the current arrangements. Auditors of clinical commissioning groups give an opinion on whether the health body’s expenditure has been spent according to Parliament’s wishes and other authorisations—I will come to that in a moment. That is because the majority of local health bodies’ expenditure is provided by Parliament and consolidated into the Department of Health’s accounts.

James Morris: Is not the Minister touching on the fundamental point, which is that it is not possible for the aspiration of the hon. Member for City of Durham to be contained in the Bill because of the way in which public money is allocated by Parliament? If she wished to achieve her legitimate objective, we would need to change the fundamental way in which public money is allocated by Parliament and give it to other bodies in a devolved format. Therefore, it is not possible to achieve what she wants in the context of this Bill.

Brandon Lewis: My hon. Friend makes a very good point. The Department needs to demonstrate to Parliament that all the resources have been used in the way that Parliament intended. As my hon. Friend said, this creates a difference between health service bodies and local authorities, because there are key differences in their accountability arrangements. Through contracts with clinical commissioning groups NHS trusts receive funds from Parliament. Local authorities are, however, directly accountable to the local electorate in a way that the health service bodies simply are not. We therefore think it is helpful for local voters if the audit report sets out the position on value for money, including when the auditor concludes that the arrangements are satisfactory. I want to make it clear that auditors will still be required to consider whether health service bodies have appropriate arrangements in place to secure value for money. The technical standards will be set out by the National Audit Office in the audit code it will produce.
Amendments 127 and 128 would set out on the face of the Bill that the auditor should consider any shared arrangements with other relevant authorities when forming their view on the authority’s arrangements to secure value for money. Where a relevant authority has appointed more than one local auditor, amendment 129 makes specific provision that those auditors can act individually or together to issue an advisory notice.
Amendments 127 and 128 are linked to the debate we had in the first sitting of this Committee, as the hon. Member for City of Durham said, regarding the amendments to enable joint audits between different public bodies where they share services or budgets. Although these amendments, of course, do not go quite as far, they do not suggest joint audit. I have nothing against the principle of these amendments, as I said in my opening remarks, but they are not necessary. The auditor will decide what they need to look at in order to form their view on each element of the audit. If they need to look into the joint arrangements, they will. That applies to every part of the audit, including the opinion on the financial statements, not just the value-for-money arrangements.
As I said earlier this week, auditors must also have regard to partnership and joint working that many local government and health service bodies increasingly operate. They must share information and co-operate with other auditors, minimise the burden of regulation on audited bodies, and make the best use of overall audit resource. We therefore think that amendments 127 and 128 would not add anything to the auditor’s existing role or powers.
Amendment 129 would enable local auditors who have been appointed jointly to act individually or together to issue an advisory notice. I do not think that is the right approach. A similar amendment was tabled in the other place, and Baroness Hanham gave an undertaking to revisit the Bill to ensure that the provisions on joint working were clear. The Government subsequently amended clause 7 to provide more clarity on the flexibility given to authorities to appoint more than one auditor to jointly exercise one or more functions, to act separately to undertake different functions in relation to different parts of the accounts, or a combination of those things.
Where more than one auditor is appointed to act jointly throughout the audit, we consider it appropriate that the auditors should exercise all functions jointly. For example, a larger authority may decide to have a specific or specialised audit of its pension fund done separately from the main audit. Auditors can be appointed to undertake different elements of the audit, and in such a situation any or all of them could issue an advisory notice. I hope that, with that explanation, the hon. Lady will withdraw the amendment.

Roberta Blackman-Woods: I thank the Minister for his response. I will go away and consider the changes made at the suggestion of Baroness Hanham in the other place, but I have a few comments.
I appreciate what the Minister has said about auditors being able to look at partnership arrangements and joint working, but the Government are making joint funding arrangements unnecessarily difficult for auditors, and I want the Minister to go away and reconsider that issue. The pooling of budgets seems to me to present a particular problem with different audit systems and different lines of accountability.
On the intervention by the hon. Member for Halesowen and Rowley Regis, just because a funding stream has to be accountable to central Government, it should not preclude accountability to the local population or a local service provider.

James Morris: The hon. Lady is talking about central Government, but my point relates to accountability to Parliament, which is quite distinct. My point is not about accountability to a Whitehall Department, but to Parliament, which is responsible for the allocation of funds.

Roberta Blackman-Woods: I am grateful for the hon. Gentleman’s intervention, but I was about to say that, although accountability to central Government is needed, there must also be accountability to Parliament. The same case applies, however, in that just because there is accountability to Parliament, that does not mean that there should not be a joint auditor arrangement that is accountable for local authorities and can be presented to a local community in a way that Parliament cannot do.

James Morris: My point is that there is a distinction. I have a lot of sympathy with the hon. Lady’s point about the importance of pooled funding and joint arrangements at local level. However, in relation to funding streams allocated by Parliament, it is clearly important, even in a joint funding arrangement, that the different portions of the funding are audited, as they are separate streams made available by Parliament. We cannot achieve what she wants, because of current central and local government arrangements.

Roberta Blackman-Woods: I do not share the hon. Gentleman’s negative approach. If we were serious about local accountability, it would be possible to have a joint audit arrangement that clearly identifies, at some level, money that has come through central Government. It would identify money for which there is accountability to Parliament, and could say something to the local community about what is being achieved through joint working and the pooling of budgets. Critically in this context, it would identify whether value for money is being delivered for the local community or whether other working arrangements—joint or not—could deliver something better.
With those thoughts to ponder on, I will leave the matter there. I hope that the Minister will have another look at it, and bring something back on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Andy Sawford: I beg to move amendment 126, in clause19,page13,line36,at end insert—
‘(7) A person providing commercial or consultancy services to an authority may not audit those services.
(8) The audit of any commercial or consultancy services provided by a person appointed as a local auditor must be subcontracted to a different local auditor.’.
You will have detected some interest in this topic on the Opposition Benches, Mr Weir. We are primed and ready to debate what we consider to be another important aspect of the Bill. Our amendment relates to the general duties of auditors. I hope that the amendment is self-explanatory, but I want to discuss why we believe that the changes are necessary and why we hope that the Government will be minded to accept them.
In 2014, total public spending is projected to be £712.9 billion, of which just shy of a quarter—24%—is spending by local government. Control of about a quarter of total public spending is increasingly distributed through outsourced contracts to private providers. Of course, local authorities have always bought or procured goods and services from the private sector—it is some time since I was member of a local authority, but this world has been shaping up for many decades—but in recent years, they have increasingly used private sector providers to deliver services that they formerly provided themselves with their own employees, equipment and facilities. Sometimes the contractors are entirely separate companies, perhaps with a long history of providing services in the private sector to local authorities and other relevant authorities as set out in schedule 2. On other occasions, the companies have been established more recently, perhaps as a result of the opportunity to establish a mutual or some other arrangement, and through TUPE arrangements for formerly directly employed public employees now becoming part of a private entity of some kind providing services to the local authority. Those structural changes, which look set only to increase and become ever more embedded in local government, have altered the powers and responsibilities of members and officers with a potential impact on the conditions for an effective independent audit.
Let me give you the example of Selby district council. I make no comment on the whys and wherefores of the arrangements but simply observe that the authority has, I think, 13 direct employees now. All other employees now work in other entities, principally the main organisation to which the authority has delegated—effectively outsourced—all its services, and of course, it has a range of other relationships with private sector firms. There are great concerns about how this is operating—are the public are getting value for money from those services and is there now an effective institutional framework to ensure value for money and to safeguard against, for example, institutional corruption?
We would all hope to ensure that corruption is less a part of our public sector landscape than sometimes the public may fear from the high-profile examples that emerge and that we should be concerned with in a debate such as this. As is often the case when dealing with issues of risk, we are focusing on the exceptions rather than the everyday rule whereby relationships between private sector providers and local authorities are often characterised by strong working relationships and by real probity in how the relationships are governed, including, for example, through local authority audit panels, which we think are very important; through standards committees and other means of ensuring standards; and through the rules by which officers in local authorities and other relevant authorities carry out their day-to-day work. Many of them are incredibly proud of the professional standards in their area of work, and we would often be talking, in relation to audit, about members of the Chartered Institute of Public Finance and Accountancy, and professionally qualified members at that. However, some issues are coming to light.
For example, two recent reports by the National Audit Office warned of a crisis of confidence. They highlight how much of the work of central Government is being contracted to firms such as Serco, with a contract of £1.8 billion; Capita, with a contract worth over £1 billion; G4S; and Atos. We all know from our constituencies some of the problems with Atos, which has contracts approaching £1 billion. The reports highlight the issues and problems that have emerged in the management of these contracts. In its memorandum on the role of major contractors, the NAO says,
“Transparency is needed to ensure that no one within the contractor can hide problems and that it is in the contractors’ commercial interest to focus on their client’s (the government’s) needs.”
Given that we are in a period of transition, particularly focusing on contracts with central Government Departments, the principle still applies. I am sure that we can all see that as the NAO will take a value-for-money role—albeit limited—in the Bill, it will have a concern for how the contracts are managed within local government.

Duncan Hames: Do any of the contractors that the hon. Gentleman has just listed in his example provide audit services to local government?

Andy Sawford: Currently the provision of audit services to local government is confined to KPMG, which is a very large firm that also provides other services to local authorities, and hence the principle that I am establishing is relevant to the clause; Ernst and Young, which also provides a range of other services including consultancy and outsourced services to local authorities, so a conflict of interest could arise; and Grant Thornton and Mazars. That list does not include Serco, which I highlighted in the example, or Capita, on which the report focuses.
Clearly, the hon. Gentlemen hopes that a lively and broad market will emerge. Some of his earlier assumptions in debate were predicated on the view that there would be a great deal of competition and that these firms could enter that market. I am sure he would accept that in the case of KPMG and Ernst and Young, which I will turn to specifically in a moment when addressing the reasons for the amendment, they are providing both services and audit to local authorities.

Duncan Hames: I do indeed accept that. Will the hon. Gentleman accept that those companies, and parts of them, also provide services to businesses in the private sector, which also receive audit services? There are existing rules within the industry’s provision of services to prevent conflict of interest. It would be helpful if he could outline to the Committee why the rules that are sufficient in the private sector are insufficient and need to be supplemented by the amendments he proposes.

Andy Sawford: The hon. Gentleman clearly has great insight into how these conflicts of interest may be managed in the private sector. I would welcome any further information he could provide to me, and other hon. Members who may be interested, about how these conflicts of interest are managed before Report.
Our clear concern today is with public audit and the spending of public money where we frankly ought to adopt a clear standard. That may reflect some standard that operates effectively in the private sector, as the hon. Gentleman pointed out. However, a brief Google will tell him that there are concerns about conflicts of interest within private sector audit and he may wish to look at that. If he can present to me and others sufficient evidence that we have nothing to worry about because the Companies Act or other frameworks of professional standards give us adequate assurance, we would be interested. At the moment, we are concerned by what the National Audit Office tells us about public audit and the expenditure of public money, and potential conflicts of interest.
We are reflecting an interesting debate in the other place in which some of the hon. Gentleman’s noble Friends raised legitimate concerns about conflict of interest. I draw his attention to the Transparency International UK report that mentions concerns about the inherent corruption risks as the institutional framework that sought to safeguard against those risks in the past is dismantled by the Government.
My hon. Friend the Member for City of Durham said a moment ago—and we have said it many times—that we accept that the Audit Commission had lost its way. Our concern in scrutinising the Bill is whether the new arrangements will adequately safeguard public money.
How might the amendment work in practice? The four current providers were given 70% of the contracts recently, and the residual 30% of Audit Commission contracts were previously in the private sector. PricewaterhouseCoopers and Deloitte and Touche are not among those four providers, but they and many other companies provide services to local authorities, and—by the nature of those companies—often those are consultancy services. Clearly if an organisation such as Serco or Capita became interested in the audit market, they would be providing a broader range of services, but often—in the case of KPMG or Ernst and Young, in particular—we are talking about substantial consultancy and other services, which could take up a substantial proportion of a small district council’s budget, but under the proposed arrangements those services may well be audited by the same company. In fact, there are no exclusions, so the same people could provide those services to a local authority. In the post-Audit Commission world, how will we, as Members of Parliament, safeguard the interests of the public pound where there is a very clear conflict of interest?
We considered whether to table amendments that would exclude private sector firms that provide other services to local authorities from providing any audit services to local authorities. We have pressed the Government on how competitive the marketplace will be on several occasions, but we will not seek to press an amendment that would exclude some of the major providers of audit services, which have the qualifications and skills that are needed to carry out that important role, from taking part in open competition to provide audit services. We have tabled what we hope the Minister will agree is a sensible amendment that states that when KPMG, for example, is contracted by Birmingham city council to provide audit services—the hon. Member for Chippenham made a point about the professional standards and probity that govern and guide how auditors operate, so we are sure that such firms could make this arrangement —it would have to subcontract to another firm the portion of its work relating to the activities of another part of the business. That is an important point, and I hope I have explained why.
If the Minister is minded to accept proposed subsection (7), which would mean that a person providing other services to a council should not audit those services, we could all agree that that is entirely reasonable. He might think that proposed subsection (8), which states that a company would have to subcontract services, would be difficult to make work in practice. Is he minded to accept the amendment, or will he give us some encouragement by going away to think about the amendment before Report?

James Morris: The hon. Gentleman gave the hypothetical example of a small district council that is audited by KPMG, and he said that it is very likely that the people doing the audit will also provide the consultancy services. That example is an extreme exaggeration of what goes on internally within a large organisation such as KPMG, in which there are clear walls between the audit practice and the consulting practice. The scenario he paints is very unlikely.

Andy Sawford: Again, I am indebted to the hon. Gentleman, because I believe he is helping to support my case. In the spirit of his remarks, I hope he will support us if we press the amendment. His point is that the risk I have outlined is unlikely, which I accept.

James Morris: Sorry. I think the hon. Gentleman is depicting a completely unreal scenario. When I used the word “unlikely” I was being generous to him.

Andy Sawford: It is reciprocal—I am forever being generous to the hon. Gentleman in trying to interpret the helpful nature of his remarks. If he thinks the scenario is impossible, there is even more reason for him to be generous in supporting the amendment, because of course the scenario will never come to be. But in supporting the amendment, we give the public the assurance that it will never happen. It may be sufficient for people in Halesowen and Rowley Regis to hear that assurance and that insight from their Member of Parliament, but I fear that our constituents around the country would perhaps want to see a clearer assurance in the Bill that a conflict of interest could not arise.
There is a point of disagreement between the hon. Gentleman and myself, in that I can clearly foresee a time when a provider of audit services to a local authority is also subcontracting with that local authority, and it may even be possible for a partner or another employee of that audit firm to have a relationship in some other way that can be connected to the local authority.
We hope that our amendments are reasonable. They do not seek to preclude any audit firm working with a local authority from providing other services to a local authority, but they seek to ensure that if a firm is providing other services to a local authority they do not participate in the audit. The hon. Gentleman says that is not going to happen, and that is a welcome point. More broadly, however, the company would then subcontract that part of its audit in connection with the services that it provides to another appropriate audit firm, which is suitably qualified in terms of the public audit.
Of course, the Minister has already envisaged, and has assured us that it could even be commonplace in many local authorities, that the company could subcontract to different audit firms for parts of their audit, or make arrangements in relation to, say, combined authorities, where different auditors work together. He has assured us that that is a quite feasible and indeed desirable part of the arrangements. We see this amendment as a logical extension, where it is quite feasible and quite desirable that the audit work will be subcontracted in respect of the work that that firm is already doing, because the conflict of interest is absolutely stark.
The warnings from the National Audit Office are clear. The trend of these firms providing a range of services to local authorities will only continue. Now is not an occasion to debate the merits of that approach in local government, but we must simply accept as a fact that it is an ever-increasing part of local government and therefore this small measure, to give confidence about independence and probity, is one that I hope we can all rally round and support, including the hon. Member for Halesowen and Rowley Regis, who may well prove to be right that it will never be needed and that there will never be a time when there is a need to refer back to this Bill, but at least people knowing that the Bill exists will give us all some confidence.

Chris Williamson: As you know, Mr Weir, I have been waiting with bated breath to get to amendment 126. I hope that you will forgive my premature intervention; in my desire to debate this particular amendment, I came in rather too soon earlier in the debate.
I hear what hon. Members say about the need for this amendment. Indeed, my hon. Friend made the point that it is very unlikely that the provisions in this amendment would ever be necessary. However, when we are talking about public money, it is important that we are not only satisfied that we are preventing a conflict of interest but that we are seen to be preventing a conflict of interest. It is the perception of the wider general public that is important.
Without the provision in the amendment, there would be a suspicion among large numbers of people outside this place and indeed outside the local authorities—among the members of the public in the local authority areas that are affected—who might feel that there is some shady, illicit practice going on. It is highly, highly unlikely that there would be such practice, but it is nevertheless important, to protect both the local authority and the integrity of the companies involved, that we ensure—through this amendment—that that accusation, or that suspicion, that might arise among the general public is avoided.

Andrew Griffiths: We heard earlier in the debate that many of these companies already provided auditing services for the Audit Commission. Can he therefore explain to us why there was no need for such a requirement in previous legislation? The Audit Commission never felt the need for such a requirement, yet the hon. Gentleman does now.

Chris Williamson: The difference is that there was oversight from the Audit Commission. That is now being abandoned under these provisions. We are in a new era where auditors are appointed by the local authority. In order to remove the suspicion that could emerge, it would be sensible to adopt our amendment.

Paul Blomfield: My hon. Friend makes an important point. I recall his memorable contribution to the debate we had about schedule 4 on the issue of close friends. The Government went to some lengths to ensure that any suggestion of conflicts of interest in relation to the composition of auditor panels was removed by the late introduction in the Lords of the provision about close friends. That is something my hon. Friend spoke helpfully about. Does he then not find it curious that the Government are not embracing our amendment to this provision, which seeks to make the same sort of attempt to ensure that any suggestion of conflict of interest is removed?

Chris Williamson: My hon. Friend puts his finger absolutely on the point in question. It is curious and, obviously, it remains to be seen what the Minister says in his response. Who knows? He may be convinced by the force of our argument and I hope that he is. The argument that we are putting forward is legitimate. What we are simply trying to do is protect the integrity and reputation of the local authority—the officers and elected members—and of the private sector auditor providers. It seems odd that in other parts of the Bill the Government want to adopt the approach that we seek to introduce in this part of the Bill, as my hon. Friend has just outlined. However, they seem markedly less keen to do so with regard to this. As I said, we will wait to see what the Minister says in his response.

Andrew Stunell: I was delighted to hear the hon. Gentleman say that you can never be too careful with public money. He has arrived slightly late at that conclusion, but I am delighted by it. Can I draw his attention to the fact that companies like PwC have been offering not just audit services to local authorities, but simultaneously consultancy and management services and a wide range of other services to improve the efficiency of local authorities, often as part of a joint offer? I note his view that this was fine because there was oversight by the Audit Commission, so would he bring to the Committee the number of occasions on which the Audit Commission’s oversight turned up the fact that there were difficulties or problems which needed to be addressed? Certainly, I am not aware of any such cases, which would perhaps indicate how legitimate the concerns that he is expressing really are.

Chris Williamson: I am unaware of any examples either, although other hon. Members may be able to enlighten me. However, I do not think that this is the point. If the right hon. Gentleman was listening carefully to my opening remarks—

Andrew Stunell: Both times.

Chris Williamson: I am delighted that he was. I am pleased that he is paying attention. If can repeat the point that I was making, it is simply not good enough in this new environment to say that we will prevent a conflict of interest. It is important that we are seen to be preventing a conflict of interest, because of the perception of the wider general public. That is the point that I am making. In order to protect the reputations of all concerned, surely it would be sensible to put in place the amendment that my hon. Friend has put forward.

Andy Sawford: My hon. Friend has, on a number of occasions, drawn the Committee’s attention to the concerns of the ad hoc Committee that the measure will simply put vast amounts of public money into private hands. The Opposition have given an assurance that that would not be the case and that the measure would be a simple safeguard against the concern that the public would quite understandably have about the private sector auditing their own private sector contracts, which are all about shareholder profit and value rather than the public interest.

Chris Williamson: Absolutely right. We are in this brave new world now. It seems sensible, in order to protect the reforms that the Government are trying to make, to adopt the amendment. We are being helpful to the Government. The amendment would buttress the approach that they want to take.

Roberta Blackman-Woods: My hon. Friend is making a strong point, which again explains why the proposed framework for audit is not up to the job of assessing what is happening. If all leisure services were contracted out to a private provider, and the leisure company shared the same auditor, it could be perceived as a conflict of interest. In combined authorities, if one company is providing a service for one authority, what will that mean for the other authorities that have signed up to the combined authority agreement? Those complex arrangements have not been reflected in the Bill.

Chris Williamson: My hon. Friend is absolutely right. As she said, the provisions are potentially not up to the job, and the amendment would certainly go some way to ensure that they approach being up to the job.
The view is shared, again, by Transparency International, which we have quoted ad nauseam. It states:
“The range of measures outlined in this Bill, combined with recent legislative reforms under the Localism Act 2011, remove key institutional defences against corruption, replacing them with arrangements that are likely to be inadequate to protect the public interest and the public purse.”
I repeat that the amendment is reasonable and moderate, and I do not understand why the Government would resist it, if that is what they are planning to do.
Effective public audit was defined by the Sharman review in 2001. The first principle of that review is that auditors must be independent of the audited body. Unless we are throwing the principles of the Sharman review out of the window, it would be sensible to adopt the amendment.

Duncan Hames: I think the hon. Gentleman is beginning to touch on the reason why the amendment is not necessary. The issue has been considered before. There are mechanisms in place in what is, after all, a profession, through which people can be disciplined for breaking the standards of their institutes and professions and lose their entire careers. There are measures in place to protect the public and, for that matter, the shareholder, to ensure the independence required of audits.
The hon. Gentleman might like to look, for example, at the Financial Reporting Council, which has agreed and published its own ethical standards for auditors. The most recent version of those standards, entitled, “Integrity, Objectivity and Independence”, was last revised at the end of 2011. There are measures in the accounting profession to ensure that the standards that he wants are upheld, but which do not require amendments to the Bill in order that they apply to local audit.

Chris Williamson: I have no doubt that those safeguards are in place. That is not the issue I am making; I am talking about perception. I am sure that those safeguards are there, but it is important that the public have confidence in the arrangements that are made with the auditing organisations, and that they do not feel, as I have said, that there is potentially untoward practice bordering on corruption. I am not saying that there is, but it is about perception. Perception often is king, is it not? In my view, we need to put in place a simple, moderate measure to overcome the problem that I am outlining, whereby the general public could have that perception. I am not the only one saying that. The Chartered Institute of Public Finance and Accountancy would agree, and indeed said as much in its observations on the Bill.
The ad hoc Committee looked at the Bill. It was stated that the proposition
“appears to conflict with one of the key audit principles in Sharman”.
I referred to the Sharman review a moment ago. Key recommendations were made by Transparency International in its document “Corruption in UK Local Government”, which was published earlier this year. A very clear, unambiguous recommendation states:
“Firms providing an audit function for local authorities should not be allowed to provide other commercial and consultancy services to the same local authority.”
That is a very clear recommendation and I urge Government Members to accept it.

Andy Sawford: My hon. Friend is making a strong case. I, too, have read the Transparency International report and I considered the recommendation that no other services to a local or relevant authority should be provided by the auditor. However, for the reasons of wanting a competitive marketplace without being too restrictive, the amendment is even more measured. It is simply a small amendment that says, “You can’t audit the services you provide”. So the Sharman principle—notwithstanding the importance that all the organisations cited, including professional standards bodies, place on independence—should encourage us to see the necessity of the clause and not think that it is unnecessary. It seems to be an argument that simply does not follow.

Chris Williamson: My hon. Friend provides an even stronger reason as to why Government Members should accept the amendment. It is a very reasonable, moderate amendment, which does not go anywhere near as far as Transparency International recommends we should go. I therefore hope that the Minister will take that on board when he sums up. I hope he will accept the amendment or give good reasons for not doing so. Also, what safeguards does he plan to put in place to deal with the perception problem?

Andrew Griffiths: Will the hon. Gentleman share with us any legal advice he has taken on the amendment? Clearly, local authorities would need to adhere to European procurement rules. They could not be anti-competitive in any way, as that would break the terms of a number of sections in the Commission’s documents. He appears to be suggesting that we should prevent certain companies from being able to compete for contracts. If so, can he advise us how that sits with European competition rules?

Chris Williamson: I do not think the amendment conflicts with European procurement rules. My hon. Friend the Member for Corby will contradict me if I am wrong on that, but I do not think it is anti-competitive in any way, shape or form. Indeed, it helps to promote competition. I think my hon. Friend would agree that the amendment would foster and facilitate more competition.
Going back to the point I made at the outset, I really hope that Members will understand the importance of the perception of the general public. We should not be putting into legislation measures that could give the impression that public money is being used in ways to enrich certain individuals and companies, and that shady practices are made easier by this legislation. We must have regard to the public who elect us, and on that basis it is important that we accept my hon. Friend’s amendment. I await the Minister’s response with interest.

Brandon Lewis: Before I turn to the amendment in detail, it is worth outlining some general points to ensure that the principles behind the measures are clear. It is important that the auditor’s integrity is not affected, and is not seen to be affected, by conflicts of interest. The test of that is not whether an auditor themselves considers their objectivity to be impaired, but whether it is probable that a reasonable and informed third party could conclude that the auditor’s objectivity either was impaired or was likely to be impaired.
Although I appreciate the thought behind the amendment, it is disproportionate. Existing rules and standards are already in place to prevent conflicts of interest, so it is not for the Government to dictate who relevant authorities—bearing in mind that they are locally democratically accountable—may appoint as their auditor. However, the Government are absolutely, completely committed to ensuring auditor independence, as demonstrated by the safeguards set out in the Bill.
For example, paragraph 9 of schedule 10 to the Companies Act 2006, as applied by schedule 5 of the Bill, which we discussed earlier, requires a supervisory body to have rules on professional integrity and independence so that local auditors are not appointed if they have a conflict of interest. The 2006 Act states that rules must ensure that remuneration is not influenced by the local auditor providing other services. The audit firms must comply with the rules. That is important, because we all want to ensure that we keep a tidy house—to use a colloquialism; we have moved on from babies and bathwater—and so will auditors.
The amendment seeks to prevent a firm from auditing any commercial or consultancy services that it provides to the relevant authority. It requires such an element of the audit to be subcontracted to another firm. I support the principle of the amendment but can assure Members that it is not necessary because sufficient safeguards—some of which I have outlined and will come on to in more detail—are already, and will continue to be, in place.
The Financial Reporting Council acts as the regulator for audits under the 2006 Act and, subject to the passage of the Bill, will take on a similar regulatory role for local public audits. As part of its role, the FRC issues ethical standards concerned with the integrity, objectivity and independence of auditors. Ethical standards require firms to establish policies and procedures to ensure that auditors act with integrity, objectivity and independence, and establish a control environment that places adherence to ethical principles and compliance with ethical standards above commercial considerations.
Ethical standards already apply to public sector audit. They include specific limitations on firms that already act as the auditor and then seek to provide non-audit services to a body. Firms must establish policies and procedures that ensure that the lead auditor is informed of any proposed non-audit engagements. The lead auditor is required to identify and assess any threats to the auditor’s objectivity. Before accepting a non-audit engagement, they must consider whether doing so could threaten, or be perceived to threaten, the firm’s objectivity or independence.
The ethical standards provide some detail about the different types of threats that could materialise. The most relevant one to the amendment is the “self review” threat, which could arise when the results of a non-audit service performed by the audit firm are reflected in the financial statements. The assessment of threats to independence and objectivity is not a one-off. The auditor must assess the significance of such threats at different stages throughout the audit—for example, when they are considering whether to accept the engagement, when planning the audit, when forming their opinion on the financial statements, when considering whether to retain the audit engagement, and if any threats are reported.
If threats are identified, the audit firm must identify and consider safeguards that would eliminate the threats or reduce them to an acceptable level. The ethical standards explain that an acceptable level might be one where it is not probable that a reasonable and informed third party would conclude that an auditor’s objectivity is or could be impaired. At any stage, if it is not possible to reduce the threats to an acceptable level, the firm must withdraw from the audit or not undertake the non-audit engagement.
The FRC’s ethical standards provide guidance about how firms may put in place sufficient safeguards for undertaking non-audit and audit work. For example, the non-audit function should be provided by a different team; there should be physical and electronic segregation of documentation between the audit team and the team providing the non-audit service; the ethics partner should ensure that the procedures operate effectively, as is common practice in the sector; and the audit team work should be reviewed by an audit partner or quality control reviewer. If there are any concerns, the audit opinion must not be issued.
I understand that the Financial Reporting Council will be reviewing the ethical standards next year. It is a good opportunity to ensure that the ethical standards reflect the broader scope of public sector audit. The code of audit practice also emphasises the requirement for auditors to exercise professional judgment and not to undertake non-audit work for a relevant authority if it would or could be perceived to impair the auditor’s independence.
In addition to the ethical standards and code, we propose a further safeguard: that the independent auditor panels should advise the authority on the adoption and content of a policy on awarding non-audit work to the auditor. The draft regulations on independent auditor panels include those provisions. Furthermore, if the auditor undertakes any non-audit work, it will be transparent; the local authority accounting code of practice requires local bodies to disclose such matters in a note to their annual accounts. A similar requirement applies to health bodies under the Department of Health’s manual for accounts.
After having taken all those things into account, authorities can, if they wish, appoint more than one auditor to undertake the audit. The auditors can be appointed jointly, to act separately in relation to different parts of the accounts or to carry out different functions in relation to the audit. We consider that all the safeguards protect the independence and integrity of the auditor.

Paul Blomfield: I hear what the Minister is saying about the Financial Reporting Council. I have worked closely with major audits of organisations for which I have been responsible in a previous life, and I understand the process intimately.
To return to the Minister’s starting point about how things would be perceived by a well-informed third party, does he not understand why we are concerned that a well-informed party might well reach the view that there was something wrong if a commercial company responsible for delivering a range of activities for a local authority was auditing the work for which it was gaining profit? There would be a perceived conflict of interest for even the best-informed third party, which suggests that our amendment is a prudent and measured response and a sensible way to deal with that perception.

Brandon Lewis: I appreciate the point that the hon. Gentleman makes. It actually endorses the reason why the Bill is structured as it is. The amendment simply does not achieve what he seeks in the way that he says it would in any way that goes beyond what is outlined. The system in place, the code of practice and the usual practice of how auditors work cover the issues, which is why we believe that the safeguards protect the auditor’s independence and integrity. With that assurance, I hope that he will withdraw the amendment.

Andy Sawford: I was about to intervene on the Minister, if he had allowed me. I am left confused. I cannot answer this simple question. If he would intervene to answer it, that would be helpful. Is he saying that the amendment goes too far or not far enough in relation to the safeguards currently in place?

Brandon Lewis: I can only draw the hon. Gentleman’s attention to my opening remarks. I said that the amendment is disproportionate, and that rules and standards are already in place to prevent conflicts of interest.

Andy Sawford: That still does not quite answer the question, but I take it from the Minister’s use of the term “disproportionate” that he is suggesting that it goes too far. That tells me that the safeguards that he has outlined are not as clear as the amendment that we have set out and do not give the same assurance to the public as our simple, straightforward amendment.

Brandon Lewis: I will repeat what I said in my opening remarks, but I will go a bit further. We are saying that it is not for the Government to dictate whom relevant authorities may appoint as the auditor. Those relevant authorities are locally democratically accountable and it is right, in the spirit of the Bill, that we should ensure that they have the power to make those decisions. It is our opinion that the Opposition’s proposed solution is simply not appropriate. The effect of the amendment would be that the lead auditor would subcontract an element of the audit. The lead auditor is accountable for the overall audit opinion. The amendment does not even deal with the potential conflict of interest if it is taken to its full conclusion.

Andy Sawford: May I suggest to the Minister that he might get another note about subsection (7)? His point about the lead auditor addresses our first point, which is that the person conducting the audit cannot be both the provider and the auditor of the services. Clearly, the second and stronger safeguard is that the company cannot audit the services it provides to that local authority, so his point about the lead auditor does not address that, although it is relevant to the first point and may be a sufficient safeguard.

Brandon Lewis: Again, I draw the hon. Gentleman’s attention to the comments I made in my speech, which outlined how auditors will work by having different teams working on the audit as opposed to their non-audit work.

Andy Sawford: I thank the Minister for his assurance and the different teams point underlines subsection (7) of our amendment, which states:
“A person providing commercial or consultancy services to an authority may not audit those services.”
Indeed, the hon. Member for Halesowen and Rowley Regis said he thought it improbable that an auditor would also be an individual or part of a team providing services to a local authority in addition to providing audit services. These are different roles and in his view there would be walls between them in an audit firm. We can accept those assurances.

Chris Williamson: My hon. Friend might be able to help me here. The Minister said that he felt that our amendment was disproportionate. Why does he think the ad hoc Committee, CIPFA, Transparency International et al disagree?

Andy Sawford: I thank my hon. Friend. It is confusing. I could not discern from the many interventions made by Government Members whether they thought the amendment was unnecessary because the current safeguards are sufficient and so it duplicates existing provisions or because it goes too far and has other adverse consequences. My hon. Friend took an intervention on the legal implications of the new procurement rules, yet the Minister rightly highlights that the practice we are seeking to make clear in the Bill is not acceptable within the context of current ethical standards.

Andrew Griffiths: That is clearly not the point that I was making. The fact that there may be practices in place which prevent a conflict of interest is completely different from barring a company from bidding for a contract under EU procurement rules.

Andy Sawford: The hon. Gentleman is absolutely right. I repeat the assurances that he received from my hon. Friend the Member for Derby North and urge him to look at the wording of our amendment 126. It does not have the effect of barring a company from bidding; it simply says to that company, in line with the ethical standards that the Minister has highlighted, that the company should take care to ensure that it does not audit its own services but would subcontract.
The Minister himself has outlined to us a whole set of circumstances in which an audit firm may work with another audit firm in the course of an audit of a relevant authority. We simply suggest that a logical part of the arrangements that he and I both envisage will develop within local authority and relevant authority audit should be a part of how we assure the public that a third person can have confidence that there is objectivity in the course of an audit.

Chris Williamson: That subcontracting, as well as reassuring the public, would have the effect of helping to stimulate the market. That is something I thought Government Members would want to happen.

Andy Sawford: I agree. I think we have a different vision of the importance of a vibrant and lively marketplace in audit, where there are a wide range of providers, large and small, that reach collaborative arrangements driven by expertise and the need to find the best way of meeting the needs of a contract with a relevant authority, taking into account all its other arrangements with, for example, neighbouring authorities and other parts of the public and private sector.
The independent panel will have to ensure that those authorities are not auditing their own activities. The Minister is implying that the amendment is unnecessary in so far as the independent panel will have to ensure that that practice occurs.

James Morris: Whatever the hon. Gentleman is trying to achieve with the amendment, would he accept that in the localist spirit of the Bill, it would be better for oversight to reside with the independent auditor panel? The independent panel should be the fundamental building block of the localist thrust in the Bill.

Andy Sawford: The hon. Gentleman’s point chimes with that made by the Minister—and repeated by him, so important did he consider it—when he implied the amendment was designed to specify for a local authority who its audit firm should be. The amendment clearly would not have that effect; it would merely require the independent audit panel to ensure, in its procurement exercise and in making audit arrangements, that a provider of independent audit was not auditing services that it provided through another part of its company, which would represent a significant conflict of interest and would threaten the auditor’s objectivity. The Opposition consider that to be entirely reasonable.
There almost seems to be agreement on that from the Minister and other hon. Members, such as the hon. Member for Chippenham, who assures us that there is a framework of ethical standards, and the hon. Member for Halesowen and Rowley Regis, who does not consider the situation to be likely but thinks that the audit panel can have a role. I do not see where the disagreement is.
It seems as though the Minister cannot see that we have arrived at a simple, clear form of words that would vastly improve the Bill. All his fine words, which helpfully form part of the record of the Committee for future interpretation, have had to be brought out in the Committee stage. If the amendment were accepted, when the public and those who will interpret the legislation looked at it—particularly the independent auditor panels, because I do not envisage that many disinterested members of the public will grab hold of a copy of this; it will not be a bestseller—they would see clearly the provisions that we have set out. The debate suggests to me that all hon. Members see those as being reasonable.

Brandon Lewis: In view of our conversations earlier in the debate, has the hon. Gentleman given any thought to the possible impact of the amendment? As I said earlier, it would be disproportionate, particularly if there was a sector-led body or, as the hon. Member for City of Durham mentioned earlier, authorities working jointly across different sectors. If procurement was done centrally from a sector-led body that all or most district councils bought into and that was contracted out, the amendment would cause a problem for that body if one of the district councils contracted non-audit services from a company that the sector-led body had contracted to do the audit. It could cause complications by preventing a sector-led body from working for those local authorities.

Andy Sawford: Precisely the opposite is true, in my view. This is the point about changing from the old framework to the new. We certainly do not envisage that a monopoly provider would be contracted through the joint arrangements; I hope that there would be a sector-led body, whether it is the Local Government Association or some other coming together of local government to establish this national joint procurement panel. I hope that they would appoint a wide range of providers, thereby facilitating the local authority, which will still have to be concerned, even though it is part of national arrangements, to ensure that its audit is carried out effectively and that the reporting is appropriate within the authority. This amendment will not discharge a local authority or relevant authority of some responsibility for ensuring that its audit is carried out appropriately, and the authority will, of course, have some dialogue with the national audit panel about its requirements, which will vary according to the size and nature of the authority and its different arrangements. In the course of that dialogue, it might indentify where there is a need to bring together a number of different auditors, as will commonly be the case in both the Minister’s and my view of how the audits will be carried out, to ensure that an auditor is not auditing its own work. A national procurement panel would be helpful.

Brandon Lewis: I hope the hon. Gentleman agrees that the fact that the non-audit work team, should there be one from the same company that is doing the audit work, would have to be a separate team deals with the matter absolutely. Our point is that the existing provisions deal with the matter that he is worried about.

Andy Sawford: I thank the Minister. He has assured us on several occasions that the first part of our amendment—proposed subsection (7), which states that an individual may not provide both audit services and services to the council—is adequately covered by the terms of the Bill. If the Minister is saying that he would be prepared to accept a revised amendment to cover the point in proposed subsection (8), because we can already be assured that under proposed subsection (7) the same individual would not be carrying out both functions, we would be prepared to withdraw the amendment and hope that he would table an amendment on Report to cover the point in proposed subsection (8). Is that what he is saying? He keeps reiterating points about proposed subsection (7), which is different from proposed subsection (8).

Brandon Lewis: No, because as I said earlier, proposed subsection (8) presents the same problem, because it force an auditor to subcontract out, so my answer is no, absolutely not.

Andy Sawford: I am still confused about whether the Minister thinks it is desirable for an audit firm to audit its own services. At times, he seems to argue that it is undesirable and that there is a range of safeguards—

Brandon Lewis: Will the hon. Gentleman give way?

Andy Sawford: I will give way in a moment. In turn, the Minister indicates that that may be a desirable approach and that our amendment is unnecessary. I am confused about the Minister’s intention, and it is important for the record.

Brandon Lewis: I am not sure whether the hon. Gentleman is trying to use the Bill to rewrite the entire rules and laws of audit for local authorities that apply throughout the country, but my point is that standard practice and existing codes of practice for audit state that if a company is auditing an authority and that authority uses that company for non-audit work, the non-audit work must be done by a different team. That satisfies the concerns that the hon. Gentleman has raised. I cannot make it clearer.

Andy Sawford: I think I can take it from that that we are talking about a different team, which is a different point. The team may be in the same company, but as far as the third party is concerned—it may be KPMG, Ernst andYoung, or whatever, or even a new entrant to the market—it will be a private sector organisation operating not in the public interest or according to charitable objectives, but in the interests of its shareholders and partners. It will do so in respect of both parts of its activities where it will have a commercial interest in ensuring expediency of the audit, albeit, we hope, to high standards, and in ensuring that its activities for the authority are profitable. That is the single most important driver for a private sector company. It may lead to a range of other benefits and may, as I am sure the hon. Member for Halesowen and Rowley Regis believes, drive competitiveness, good price and good practice, and ensure a good service, but that is not the motive. The motive is profit and if two parts of the same company, both motivated by profit, audit each other, we can all see that there is a clear conflict of interest, which we should seek to eliminate from public sector auditing.

James Morris: I want to make a different point. Is the hon. Gentleman arguing that a small local accountancy firm auditing a local authority’s accounts should be excluded from, for example, providing management accounts to the local authority? Would it have to subcontract that role to a third party?

Andy Sawford: The hon. Gentleman makes an interesting point. It may be that we can have a further debate on the regulations or guidance that the Government could introduce. From my point of view, the hon. Gentleman’s contribution is helpful, and I hope the Minister heard it loud and clear. If a company is providing the management accounts of an organisation should it be auditing it? The whole point of an independent audit is that the auditor does not provide the management accounts. The hon. Gentleman’s example is extraordinary and demonstrates why it is so important to ensure that the same people do not provide those two services.

James Morris: On that point, when we are encouraging smaller firms to bid for work, is the hon. Gentleman seriously suggesting that a small accountancy firm, part of which provides audit and part of which provides management accountancy functions, should subcontract the management accountancy function to a third party? Is he seriously suggesting that as part of his amendment?

Andy Sawford: I think the hon. Gentleman imagines that we can find a context in which the size of the conflict of interest becomes the defining factor in whether it is a conflict of interest. To me, a conflict of interest is prima facie a conflict of interest, and should not be allowed in respect of auditing public money.
If the hon. Gentleman heard the Minister’s welcome response, he would have heard that the independent panel has a role to play in ensuring that that kind of conflict does not arise. The confusing element of the Minister’s response is that at times he argued that our amendment is unnecessary and at times he argued that it is disproportionate or goes further than what is set out. However, the independent panel will have to ensure that a conflict of interest does not arise. We would have to say to the small firm that is bidding to provide a range of services to a public body that there is very little reason why, if it provides the management accounts, it should not also provide the sandwiches for the meetings.
We are talking about something very particular here. We are talking about public audit, public money and the principles of independence and transparency. It seems that hon. Members have accepted the principle, although there seems to be a barrier to the Government accepting our simple amendment. I hope that, in the spirit of the debate, the hon. Gentleman and hon. Members will now support the amendment. I am left in the position of considering, based on the helpful advice I have had from the Public Bill Office and others, whether we wish this important issue to survive to another day, and whether we should debate it further on Report and Third Reading.
I wish to make a request of the Minister. Although I am not clear about the end point of his remarks, he set out a range of ways in which he believes the issues of conflict of interest can be addressed. I will look back at the record, but it would be incredibly helpful if he could provide more detail on those things, such as the ethical standards framework. That would help us to decide whether and how we push this issue forward, which we consider to be very important, at a later stage. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Michael Weir: We have had a fairly lengthy discussion on the clause, so unless there are any new points that anybody is desperate to debate, I will put the Question on clause stand part forthwith.

Clause 19 ordered to stand part of the Bill.

Clause 20  - General duties of auditors of accounts of health service bodies

Andy Sawford: I beg to move amendment 137, in clause20,page14,line1,leave out paragraphs (d) and (e).

Michael Weir: With this it will be convenient to discuss Government amendment 30.

Andy Sawford: The debate on the previous clause was much longer than Opposition Members had envisaged. We had hoped that the Government would accept our position and see sense quickly and readily, but I regret that they did not do so. However, because of that, I will abbreviate my remarks, which have already been partly aired by my hon. Friend the Member for City of Durham.
Amendment 137 highlights a variance between the provisions for relevant authorities other than health service bodies and those for clinical commissioning groups, which, as hon. Members will be aware, distinguishes clause 20 from clause 19. Under clause 20, a local auditor auditing the accounts of a clinical commissioning group must, by examination of the accounts and otherwise, be satisfied of several factors, some of which duplicate those for other relevant authorities, but subsection (1) adds paragraphs
“(d) that money provided by Parliament has been expended for the purposes intended by Parliament”,
and
“(e) that resources authorised by Parliament to be used have been used for the purposes in relation to which the use was authorised”.
To us, those seem to be ring-fencing provisions. As we are all localists—I did not say, “We are all localists now”, because I have always been one, and my regret is that we have not persuaded all Members of the House to be fervent localists—I am sure that we all agree that ring-fencing is not a good idea. The situation of clinical commissioning groups goes to the heart of the debate we always have about ring-fencing. When money is allocated to them for a particular health issue or challenge in an area—for example, additional funds for flu jabs or vaccinations against some emerging peril, or for the accident and emergency crisis that our country faces this winter—the Government want to attach clear strings to the expenditure of money allocated by Parliament. The provisions are a means of giving effect to such a ring fence.
I would rather not debate the principle of whether ring fences are right or wrong, but I want to understand what the Government intend by those provisions, if they are simply a ring-fence measure. If that is not the basis for them, what is their justification? I ask the Minister to consider whether they are necessary, given that we hope that clinical commissioning groups will work increasingly closely with other relevant authorities, for whom provisions are set out in clause 19. As far as possible, we want consistency in how relevant authorities and health service bodies are affected by the legislation.
As Lord True has pointed out in the other place and as my hon. Friend the Member for City of Durham has said on several occasions, we fail to understand why the Government are creating a complex set of arrangements with substantial variances between the provision of audit for health service bodies and other relevant authorities. Will the Minister briefly explain why the provisions are needed in clause 20, but not in clause 19, and their purpose? That would be helpful to Opposition Members in deciding whether to press for their deletion.

Brandon Lewis: I welcome the hon. Gentleman’s remarks, particularly on ring-fencing and localism, because I experienced the joys of the Localism Bill Committee in 2010. I remember listening to my right hon. Friend the Member for Hazel Grove, who I suspect would at that time have enjoyed having the hon. Gentleman’s company in arguing the case for pure localism. The hon. Gentleman’s then colleagues—it was before he entered Parliament—seemed to spend the entire Committee arguing for centralism against localism.

Andy Sawford: I thank the Minister for his kind remarks, but I remind him that I was the first witness to give evidence in public to that Committee and to embrace many of the Localism Bill’s principles, which I had long championed.

Brandon Lewis: I remember those days well.

Andrew Stunell: I have to give some credit to the hon. Member for Corby, as he was a frequent and helpful informal adviser during the passage of the Localism Act 2011, so I am pleased to hear that he is not in any way resiling from those views. At the time, we both mourned the fact that his party was somewhat far behind him in repenting.

Brandon Lewis: I hope that the hon. Member for Corby will drag his party towards the true spirit of localism as we move forward. His remarks indicate that he is pleased that the Government took away much ring-fencing, which was one of the things I found more frustrating when I was a local government leader.
Rather than delay the Committee further by reminiscing about the Localism Bill, which we all enjoyed for many months, I will turn to the amendments.
Amendment 137 would dispense with the requirement for local auditors of health service bodies to examine and be satisfied that clinical commissioning groups have used the money provided and resources authorised for the purposes intended by Parliament. It is worth mentioning here again that the health service and local government have different governance structures, which I will now briefly outline.
Clinical commissioning groups receive money and resources that are decided by Parliament. The Government Resources and Accounts Act 2000 requires all Government Departments funded by Parliament to have a regularity opinion on their accounts to ensure that the money provided and resources authorised have been used for the purpose that Parliament intended. Given that, paragraphs (d) and (e) of clause 20(1) are necessary as they require local auditors to examine the accounts of clinical commissioning groups and to provide the necessary opinion on regularity. The regularity opinion is therefore an essential element in providing assurance to Parliament on how clinical commissioning groups are using their funds.
Unlike local government accounts, the accounts of health bodies are consolidated within the Department of Health resource account. As a result, the Department considers it necessary to put the requirement to have opinions on the accounts in the Bill, rather than in the National Audit Office code, as it is necessary to provide assurance to the accounting officer and to Parliament that budgets have been used for the purposes that Parliament intended. The clarity of reporting requirements given by the inclusion of the specific matters on the face of the Bill is welcomed by the NAO and—dare I say it—the Audit Commission. With that clarification, I hope that the hon. Member for Corby will be able to withdraw the amendment.
Government amendment 30 is a technical amendment to the provisions that set out the general duties of auditors of health service bodies. It makes explicit in the Bill the practice that already happens. The Bill currently places a requirement on the local auditor of a health service body to examine the accounts and carry out other duties to satisfy itself on several matters, including whether the accounts are true and fair, whether they have been prepared in accordance with proper accounting practices and relevant legislation and, in the case of clinical commissioning groups, whether money has been spent in accordance with Parliament’s intended purposes. As the Bill stands, the auditor is required to provide a certificate to confirm that the audit has been completed. It also has to provide an opinion on the accounts and if it is not satisfied on value for money, it also has to provide an opinion on that. Amendment 30 will require auditors of health service bodies to provide a report on all matters on which they have a duty to satisfy themselves, other than value for money, on which they will have to include their opinion in the report only if they are not satisfied.

Andy Sawford: I am not sure whether this is in order, Mr Weir, as I am not as accustomed to such practices as you and the Minister, but he has given us ample reassurance and we intend to withdraw the amendment.

Brandon Lewis: I appreciate that, but I will just finish what happens to be my last sentence—it was perfect timing—on amendment 30.
In practice, auditors of health service bodies already report on all the matters on which they are required to satisfy themselves. Amendment 30 makes that an explicit requirement to avoid doubt and to ensure transparency.

Andy Sawford: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: 30, in clause20,page14,line18,leave out from ‘must’ to end of line 23 and insert—
‘(a) enter on the accounts a certificate that the auditor has completed the audit in accordance with this Act, and
(b) make a report in accordance with subsection (5).
‘(5) A report under subsection (4)(b)—
(c) must contain the auditor’s opinion on the accounts, including on the matters in subsection (1) or, as the case may be, subsection (3), but
(d) must not contain the auditor’s opinion on the matter in subsection (1)(c) or (3)(c) if the auditor is satisfied as to that matter.’.—(Brandon Lewis.)

Clause 20, as amended, ordered to stand part of the Bill.

Clause 21  - Auditors’ right to documents and information

Andy Sawford: I beg to move amendment 138, in clause21,page14,line25,leave out ‘every document’ and insert—
‘documents relevant to the audit’.

Michael Weir: With this it will be convenient to discuss the following:
Amendment 139, in clause21,page15,line1,leave out ‘and inspect’.
Amendment 140, in clause21,page15,line9,leave out paragraph (b).

Andy Sawford: Both sides are making a determined effort to make a little more progress this afternoon, so I intend to be brief. In the spirit of the scrutiny my hon. Friends and I bring to the Committee, we could have taken some time on the clause, but I hope that, if I set out our position in brief, the Minister will understand where we are coming from and give us some reassurances.
The amendments are to clause 21, which is on the auditors’ right to documents and information. I have looked into this. The Audit Commission had legal rights to access information, which were emphasised in relation to the production of public interest reports. We all support the principle of the clause that the auditor should have rights to documents and information. Our amendments, though, are intended to be helpful and to test the Bill’s meaning on a few specific points.
Amendment 138 would change the term from “every document”. We are asking about proportionality: whether the Government really mean every document, or whether they mean, in fact, documents that particularly relate to the audit. We want to be clear about the Government’s intention. Will the Minister consider that wording?
On amendment 139, will the Minister say whether he really intends that auditors should be able to access and inspect any computer that may have been used to produce an audit document? An elected member of a local authority might, like myself—or perhaps the Minister—use a wide range of IT devices in different places at different times. For example, they may have access to a computer in the members’ room or an office within the local authority, they may have a personal computer, they may occasionally access documents on the way to or from a meeting on a work laptop and they may have a family iPad or some such device on which they occasionally access information. Given that that is increasingly how many people live their lives, does the Minister think it practical and reasonable for an auditor to seek access to those devices?
Clearly, it would be quite reasonable if a device were based in a local authority—in the members’ room, for example—for the auditor to ask to look at the device. Documents might not have been printed off, they could have been exchanged by e-mail, or they could be in draft form and the auditor might find it helpful to look at the drafting and changes. Documents might not be available as hard copy but might be stored on a computer. It comes to a different matter, however, when there might be a knock on the door of the family home and an officer of a local authority or their partner or a member of their family answers the door to an auditor who wants access to a family computer or iPad.
There could still be complications in relation to a work laptop. I hope the Minister does not mind me stretching the point, but would it be reasonable for an auditor to demand to see the work laptop of an employee of GCHQ or the Ministry of Defence? Will the Minister tell us whether the use of this power has been given consideration? How does he envisage it will work in practice and in what circumstances may that power be used? It may be only in limited circumstances.
Will the Minister consider this point? If there might be a six o’clock knock on the door of the family home, might it be expected that that would be an investigation of some form of criminality or fraud? In which case, would other provisions in law allow for the inspection of computer equipment by police officers, an employee of the Crown Prosecution Service or some other such person who is suitably qualified and operates within a different legal framework to a private sector auditor?
We could have gone on at great length about this point, but we will be very brief. We are trying to foresee what could happen in a new world where a private sector auditor has been given powers, and someone’s refusal to allow access to the computer was an offence under clause 22.
We are concerned about the wording
“in charge of, or otherwise involved in operating”,
which we would consider too broad a description of what laptops or electronic devices would be potentially subject to some form of investigation. Could the Minister give us some clarification and assurance?

Brandon Lewis: I appreciate the comments of the hon. Gentleman. I hope that I can deal with his concerns without spending too much time on the detail.
When I was a councillor, the leading party on the council, which was a different party to my own, had various issues with local authority officers needing to get into councillors’ computers to look at what they were and were not doing and the process that they had to go through. However that is quite different to the auditor’s position, and hopefully I can give the hon. Gentleman some confidence. Amendments 138, 139 and 140 change the rights that auditors would have to access documents and information, as he rightly says. Let me take amendment 138 first. It proposes a redrafted definition, as the hon. Gentleman outlined. I hope that I can convince him that it is not necessary.
The definition of an audit document continues in clause 21(1)(a) and (b). Those subsections specify that the document must relate to a relevant authority, and in the auditor’s view be necessary for the purposes of undertaking the auditor’s function under the Bill. I agree that an auditor should have a legal right to access only documents which are relevant to the audit but subsection (1)(b) already provides this restriction to the definition, and I consider that the current draft is preferable to that in the amendment.
Amendments 139 and 140 would reduce auditors’ rights to access documents and information compared to the current rights under the Audit Commission Act 1998. The amendments would remove an auditor’s right to inspect a computer which they consider has been used in connection with a document, as well as an auditor’s right to require the person operating the computer to provide further information. I am sure that the hon. Gentleman does not wish to restrict the rights of auditors to get information that they need in order to undertake an audit. I know that is not the point he was making. If the amendments are intended to ensure that the auditor does not have carte blanche to access documents that have no relevance to the audit in an unreasonable way, as he outlined, then I have sympathy with his intent.
I think that the Bill already contains sufficient safeguards. Clause 21 contains some restrictions to the auditor’s rights to access information, documents and explanations from people, so for instance they do not have the right to access documents and information which are not necessary for the audit. With that explanation, I hope that the hon. Gentleman will be able to withdraw the amendments.

Andy Sawford: I thank the Minister, particularly in relation to amendment 138. He has given sufficient assurance on that point about his intentions and the subsequent qualifying clauses. The record will be clear on that and I welcome his assurances.
I still have serious concerns about the practicality and potential implications of the clause overall. I find myself in a difficult position however, because I am sure there is no difference of view between the Minister and I, and indeed all hon. Members, on the need to facilitate access to all relevant documents concerned with an audit. It is more a practical point about cause and effect, given that we are making an offence under clause 22. I ask the Minister, who will have a leading role in shaping future regulations, to reflect on how, in any regulations or perhaps in the ethical standards framework, we could ensure that the public—for example, the partner or family member of a person set out in subsection (8) to whom the clause applies—are protected. How can we protect those people from what could be quite an imposing request by an auditor for access to their home or IT material? Will he consider that?

Brandon Lewis: I am happy to take away the general point. We all recognise that we are in a fast-moving world and that IT and how we use it change quickly. I believe that we are in agreement throughout the Committee on the need to ensure that auditors can get access to the information that they need to do the audit and to follow that through. Obviously, an auditor does not have the power simply to go into someone’s home—quite rightly that is something for the police and the relevant authorities, with warrants and so on, and not for an auditor.
With the proviso that we need to make sure that auditors can get reasonable access to the information that they need for the audit, I am happy to take away the hon. Gentleman’s comments and give some thought to exactly how we couch the provision in the regulations that will have to follow to implement that. In a fast-moving world, we need to ensure that auditors can get their job done efficiently and effectively.

Andy Sawford: I thank the Minister for his comments. On access, perhaps it is a case of how that is interpreted. If someone wrote a letter seeking access and waited a reasonable time for a response—although such inquiries need to be conducted expediently—or sent a reasonable e-mail seeking entry, that is quite different from the powers, which he rightly said rest with the police, for forced entry and so on. I think we have explored the point. I suppose it reflects that we are moving away from the era of large desktop computers to different ways of using IT. In the world of the cloud, we can access our documents all over the place, all the time and with all sorts of different items.
I thank the Minister for assuring us that he will give some further thought to this matter. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: 31, in clause21,page15,line28,at end insert—
‘(8A) A local auditor of the accounts of a parish meeting may only exercise the function in subsection (7), so far as it applies to a person who is or was a member or officer of a relevant authority, in relation to a person who is or was the chairman of the parish meeting or the proper officer of the district council within whose area the parish lies.’.—(Brandon Lewis.)

Clause 21, as amended, ordered to stand part of the Bill.

Clause 22  - Offences relating to section 21

Amendment made: 32, in clause22,page16,line14,at end insert—
‘(4A) Subsection (3) does not apply in relation to a parish meeting unless the offence is alleged to have been committed by the chairman of the parish meeting or the proper officer of the district council within whose area the parish lies.’.—(Brandon Lewis.)

Clause 22, as amended, ordered to stand part of the Bill.

Clause 23 ordered to stand part of the Bill.

Schedule 7  - Advisory notices

Brandon Lewis: I beg to move amendment 33,in schedule 7, page60,line38, after ‘is’ insert
(i) a functional body,
(ii) an entity connected with a functional body, or
(iii) ’.

Michael Weir: With this it will be convenient to discuss Government amendments 35, 38, 39 and 41.

Brandon Lewis: I hope not to detain the Committee long with this group of amendments. The purpose of the amendments is to ensure that the Greater London authority receives a copy of any public interest report or written recommendation made in relation to one of its functional bodies. The amendments are necessary following a recently proposed change in the way that functional bodies are treated within the GLA’s group accounts.
The Bill already requires that a copy of a public interest report or written recommendation on a body that is a “connected entity” of a relevant authority is sent to that authority. The proposed change not to include functional bodies within the GLA’s group accounts, however, would mean that they no longer meet the definition of a connected entity and fall under that requirement. The amendments ensure that a similar requirement continues to apply to the GLA and its functional bodies, to ensure adequate transparency and scrutiny where such a report or recommendation is made. That is necessary given the close and unique relationship between the GLA and its functional bodies.
Amendments 38, 39 and 41 make minor drafting changes needed as a consequence of the Mayor’s Office for Policing and Crime ceasing to be a connected entity of the GLA. They do not change the policy position, but simply correct the drafting of the existing requirement that reports and recommendations on the Metropolitan Police Commissioner are considered by the Mayor’s Office for Policing and Crime.

Andy Sawford: I support the broad intention behind the amendments, which seem to tidy up many areas, particularly in respect of the Mayor’s Office for Policing and Crime. I note in passing and welcome the Minister’s commitment to the role of the GLA and hope that, in the spirit of our earlier debate, the London assembly would receive the report and that it would not go only to the Mayor. It would be helpful if the Minister clarified that point.

Brandon Lewis: Yes, I can confirm that.

Amendment 33 agreed to.

Amendments made: 34,in schedule 7, page61,line14, leave out sub-paragraph (2).
Amendment 35,in schedule 7, page61,line22, after ‘is’ insert
(i) a functional body,
(ii) an entity connected with a functional body, or
(iii) ’.
Amendment 36,in schedule 7, page62,line4, at end insert—
‘(3A) Sub-paragraph (3)(a) does not apply in relation to a parish meeting.’.
Amendment 37,in schedule 7, page62,line35, leave out sub-paragraph (8).
Amendment 38,in schedule 7, page63,line2, leave out from ‘entity’ to end of line 4 and insert ‘, subject to sub-paragraph (2A).’.
Amendment 39,in schedule 7, page63,line4, at end insert—
‘(2A) This paragraph applies to the Mayor’s Office for Policing and Crime where a local auditor has made a report or recommendation relating to the Commissioner of Police of the Metropolis regardless of whether the Office is a connected entity or was such an entity at the time to which the report or recommendation relates.’.
Amendment 40,in schedule 7, page63,line10, leave out from ‘authority’ to end of line 11.
Amendment 41,in schedule 7, page64,line10, leave out sub-paragraph (2) and insert—
‘(2) This paragraph does not apply where a local auditor has made a report or recommendation relating to the Commissioner of Police of the Metropolis regardless of whether the Commissioner is connected with the Authority or was so connected at the time to which the report or recommendation relates.’.
Amendment 42,in schedule 7, page65,line3, at end insert—
‘(2A) The functions of a parish meeting under paragraph 5 are to be exercised by the parish meeting itself (and not by its chairman on behalf of the parish meeting).’.
Amendment 43,in schedule 7, page65,line29, at end insert—
‘(5A) Sub-paragraph (5) does not apply in relation to a parish meeting.’.—(Brandon Lewis.)

Schedule 7, as amended, agreed to.

Clauses24 to 26 ordered to stand part of the Bill.

Clause 27  - Declaration that item of account is unlawful

Brandon Lewis: I beg to move amendment 44, in clause27,page19,line6,leave out from ‘may’ to end of line 7.

Michael Weir: With this it will be convenient to discuss Government amendments 45 and 46.

Brandon Lewis: The amendments clarify the process and time scales for a local elector to make an appeal following an auditor’s decision not to make an application to the court that an item of account is unlawful. The amendments reflect the current process under the Audit Commission Act 1998.
Clause 27 currently enables a local auditor to apply to the court if they consider that an item of account is unlawful. If an elector has raised such an objection with the auditor but the auditor has decided not to apply to the court, the elector has six weeks during which they can require the auditor to provide written reasons for their decision and appeal the auditor’s decision to the court.
The Bill as drafted was intended to reflect the provisions in the 1998 Act on time scales to appeal against the auditor’s decision, but after further discussions we have concluded that the existing arrangements were not sufficiently clear and so have decided to set the matter out in the Bill. The amendments make the legislative provision clear by setting out the time periods in the Bill. The local elector first has six weeks to require the auditor to provide a statement of reasons for their decision not to apply to the court, and then, once that has been received, a further 21 days to appeal the auditor’s decision to court. The 21-day period is consistent with that set out in the Civil Procedure Rules 1998.

Andy Sawford: We have commented on where we think prescription is unhelpful and unnecessary in the Bill, so it would be inconsistent of us not to welcome prescription in the Bill that is in the public’s interest because it ensures that they are able to make objections at audit and know what the process for that is. In that spirit, we will not oppose the Government’s amendments.

Amendment 44 agreed to.

Amendments made: 45, in clause27,page19,line8,after ‘(a)’ insert
‘within the period of 6 weeks beginning with the day after that on which the person is notified of the decision,’.
Amendment 46, in clause27,page19,line9,after ‘(b)’ insert
‘within the period of 21 days beginning with the day after that on which the person receives those written reasons,’.—(Brandon Lewis.)

Brandon Lewis: I beg to move amendment 47, in clause27,page19,line16,at end insert—
‘(5A) Subsection (5B) applies if a local auditor of the accounts of a relevant authority incurs costs in determining whether to make an application under this section in relation to the authority, but the application is not in fact made.
(5B) The local auditor may recover the reasonable costs so incurred from the relevant authority.’.

Michael Weir: With this it will be convenient to discuss Government amendments 50 and 52.

Brandon Lewis: I should like to thank the hon. Member for Corby for his support on the previous amendment. It helps us to tidy up the provision and make things clear for electors, which is hopefully helpful for people in the public domain.
The Government amendments will enable local auditors to recover costs of their time in undertaking their additional statutory audit duties under the Bill where that work does not result in any formal action being taken. We expect that the contracts between authorities and auditors will set out how auditors’ costs are to be recovered. Following pre-legislative scrutiny of the draft Bill, we amended the Bill to give auditors an explicit right to recover reasonable cost from the auditor body for their time in exercising some of their statutory duties. These further amendments will enable auditors to recover reasonable costs for their time in investigating—but ultimately deciding not to take action—three of their statutory functions: first, whether to make an application to the court that an item of account is unlawful; secondly, whether to issue an advisory notice; and thirdly, whether to apply for a judicial review of an authority’s decision. The Bill already makes similar provision for auditors who investigate issues that lead them to make public interest reports and written recommendations.
The amendments would ensure consistency in treatment of cost recovery for such functions and enable local auditors to recover reasonable costs incurred in investigating issues that could result in them exercising their main statutory functions under the Bill.

Andy Sawford: I find myself with slightly conflicting views about the implications of the clause, and I think the Minister will understand why when I say that on the one hand we clearly want to ensure that the auditor can carry out his statutory duties, particularly in relation to the more serious points that the clause seeks to address around unlawful practice; and on the other hand, we are all acutely conscious that local authorities are trying to manage budgets in a difficult environment in which they will not want to face unreasonable costs. Whether we support the amendment, or certainly do not move to oppose it, depends on the Minister giving us some assurance regarding the word “reasonable”. It is not so much about a definition in the Bill, because the term “reasonable” is widely used in law and in legislation; it is more about the Minister indicating whether he envisages that the scale of charges might be negotiated up front by the joint procurement body or by the independent audit panel appointing auditors.
We all know from various parts of our lives, whether that is seeking legal advice, conveyancing or banking charges, that we can at times be surprised by the charges that we find ourselves having to meet. We would not want local authorities to be prey to the perhaps exceptional situation where the auditor has not been reasonable in placing charges on the authority. It would be helpful if the Minister commented on whether there could be some kind of scale of charges or something to create a framework, because that would give us more assurance that this issue will not get out of hand.

Brandon Lewis: Obviously, if there were a sector-led body, it would be logical to assume that it would look into tying all these things into the wider contract for the sector, but that would be a matter for the sector and that body. We expect that contracts between auditors and relevant authorities will specify what costs auditors can recover from the relevant authority. That recovery will effectively be up front, as the hon. Gentleman said, and include the costs of any external advice that the auditors sought in investigating the matter and deciding whether to exercise the statutory function.

Amendment 47 agreed to.

Clause 27, as amended, ordered to stand part of the Bill.

Clause 28 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Claire Perry.)

Adjourned till Tuesday 19 November at five minutes to Nine o’clock.
Written evidence to be reported to the House
LAA 05 John Brace
LAA 06 Karen Heath